'Cramdowns' Could Aid Homeowners In Bankruptcy

BOSTON — For homeowners struggling with a mortgage larger than their home's value and who are only a step ahead of foreclosure, a relatively new legal tactic sounds like a magical cure.

Not only can they avoid losing their home, but they can reduce the size of their mortgage, possibly by tens of thousands of dollars, at the stroke of a judge's pen.

The tactic has been nicknamed ''cramdown'' and is used when a person files for bankruptcy protection under Chapter 13 of the federal bankruptcy code.

A case in U.S. Bankruptcy Court in Boston, which established the precedent in Massachusetts, has a lot of high-debt, short-on-cash homeowners calling attorneys and asking if they might benefit.

In that February decision, Mordred J. Richards, 32, who owns a two-family home in Jamaica Plain, was able to reduce the mortgage on his home from $185,000 to $120,000.

Simplified, a cramdown - technically, a ''bifurcation'' - works like this: A homeowner has a $150,000 mortgage, but a home worth $100,000. The monthly mortgage payment is $1,500. The homeowner files for a Chapter 13 bankruptcy in U.S. Bankruptcy Court.

The homeowner asks the judge to ''cram down'' the debt into two separate pieces. The first piece, $100,000, is secured by the value of the home. The second piece, $50,000, is unsecured.

Under bankruptcy law, unsecured debt must be paid back, but typically is paid back at only 10 or 15 cents on the dollar, attorneys said. It must be paid back within five years.

Assuming the judge signs off on the plan, the debtor has reduced his mortgage to $100,000. The homeowner still must make monthly payments of $1,500, make up any missed payments, and pay back the unsecured creditors.

So far, only a few hundred cramdowns have been attempted nationally.

Many observers feel the number will remain small because relatively few homeowners' are in circumstances in which a cramdown would be helpful. Others, especially lenders, who see loan values being stripped, worry that cramdowns will become as popular as no-fee checking accounts.

Attorney Joseph G. Albiani believes they offer salvation to many and has advertised cramdown seminars on radio.

''Most of these people have one nostril above the waterline, and are hoping no one goes by in a boat,'' he said. The simple threat of a cramdown can be used as leverage to renegotiate the loan with a lender, he said.

And if that doesn't work, there's the cramdown itself. If a homeowner wins in court, his mortgage will be the same as the value of the home. They would then be able to sell, or possibly refinance. Albiani conceded, however, that he has yet to win a cramdown case in Bankruptcy Court.

Detractors say a major drawback will likely keep cramdowns from widespread use: Homeowners with fixed-rate mortgages will not see any difference in their monthly bill.

They must pay the same monthly amount because judges have ruled the terms of the mortgage cannot be rewritten. Also, any missed payments must be made up. A homeowner's gain from a cramdown will be in the future, because they pay off their mortgage in fewer years.